Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for continuing to join us here at our -- the Goldman Sachs Industrials and Materials Conference. My name is Adam Samuelson. I'm the Head of Agribusiness Equity Research with Goldman. We're very pleased this afternoon to have Nutrien present and conclude our afternoon session. From Nutrien, presenting is going to be Pedro Farah, their Chief Financial Officer. We also have Richard Downey and Tim Mizuno, who lead up their IR, their Investor Relations, efforts on the line as well. I believe Pedro is going to start with a brief presentation and an overview of the company and current market outlook, and then we'll get into questions. I'd also encourage everybody to submit questions via the Q&A box in the bottom of your webcast screen. We'll be getting to audience questions and we encourage audience participation through the session. So with that, Pedro, I'll turn it over to you and your prepared remarks.

Thank you very much, Adam. So I'm told that you all have our presentation that may or may not be in the site here. So I thought I will go very briefly through the few slides that I have here just to set -- start the train, and then we'll open up for questions. So number one, thank you very much for inviting me, Adam, and it's great to be here again. I think we are a frequent speaker in the conference as well. So I would like to just turn to Page 2, and it contains some of our forward-looking statements to note. And in Page 3, I'll kind of give a few overview -- a quick overview about Nutrien, which was created as the largest crop input and service provider in the world. And today, we're the largest global ag retailer, with a full suite of products, services and solutions, including a leading digital platform, and we are having an expanding line of proprietary products as well. And it is the world's largest wholesale fertilizer producer as well. We produce and sell approximately 25 million tonnes of fertilizer, and 3 million of which are sold through our retail platform alone. And we have a strong balance sheet, with approximately $4 billion of liquidity, a very strong cash flow and stable and growing dividends, which we have recently announced for Q2. If I pass to Slide 4, we focus a bit on retail and to provide an update on the organic and M&A-driven growth that we have there. So first, let me touch on the highly accretive M&A strategy. Last year alone, we developed -- we deployed, sorry, about a $1 billion in tuck-ins and large strategic acquisitions, adding approximately $100 million to $125 million of expected EBITDA in 2020. And we have made significant investments in Brazil recently, and we're about half of our way to our goal of $1 billion sales in the country. Second, we benefited from both the size and scale of our network and depth of our offering. We have seen excellent uptake in adoption of our digital platform, which allows us to scale in sales and offerings very quickly and efficiently. In Q1, we saw 40% of all of our retail products that were available online ordered through the digital platform already, a bit ahead of our schedule. And we also offer a wide range of products and services providing the customers a one-stop shop for all of their ag needs. One of the highlights, as I kind of quickly alluded before is our proprietary products, which now represents 25% of our retail gross margin. So if I turn to Page 5, you could see that our retail business has provided historically stable margins and earnings. And despite all the headwinds we had in 2019, we delivered very strong EBITDA. And this year, according to our guidance, we anticipate far surpassing that. So our forecast EBITDA growth, it will be evenly split between acquisitions and organic growth with about $70 million coming out of our Ruralco acquisition. In Page 6, so potash. We are the largest producer in the world. We have one of the best supply chain capacities in both our domestic market and offshore through Canpotex. Our mines or 6 mines are amongst the safest and lowest cost in the world, and we have significant capacity available to grow with the market. In fact, we have 6 million tonnes of burst capacity available that we can bring to the market to respond to new growth and more than any other producer in the world. That was the case in the past. If there was any kind of disruption in supply, we are there to plug that hole. And as the world needs that supply, we'll be there. In Slide 7, let me touch on the nitrogen business, where we have also a great competitive position. Nearly 70% of our production is in North America, half of which is AECO, half of which is NYMEX-based and therefore, benefiting from access to cheap, reliable natural gas. And the [ cost and rate ] advantages we enjoy also are advantageous relative to our offshore importers. However, we have seen ammonia prices a bit under pressure lately due to the global industrial demand that was a bit lower due to the COVID-19, and that industrial demand accounts for about 20% of the global nitrogen demand. So since the close of the merger, we have invested to improve our position in nitrogen, where we put about $300 million of capital to work on debottlenecking of our North American footprint. And we expect now to add another 800,000 to 900,000 tonnes of incremental nitrogen sales in 2021. So unlike others in our space, we -- the growth story is a unique combination of price and volume. So if I pass to Slide #8, let me kind of address capital allocation. As you can see in '19, there was a balanced approach to maintaining our assets, investing our future growth, acquisitions and return of capital. And no other company in our sector has returned as much capital to shareholders as Nutrien over the past 2 years. Since the merger, we have increased our dividend twice and repurchased over 11% of our outstanding shares, including 4 million shares in 2020 so far. So in a time of economic uncertainty as we have right now, many companies are scaling investments, buybacks and even dividends. So however, Nutrien is very committed to a stable and growing dividend. And with our current price, our yield is north of 5%. I think it's 5.7% right now. And we remain committed to our stable growing dividend policy. So in Slide #9, just to touch on sustainability. We plan to roll out sustainable agriculture strategy in 2020, which will position us to be a leader to help farmers feed the world in a more sustainable way, and we made investments in products, services and technology that can make a significant and positive contribution to sustainability. This will be a multiprong approach, including new ag biological products, emission controls at our nitrogen facilities and our best agronomic tools to improve crop input efficiencies. This also would extend the digital tools that help growers make more informed decisions and would encompass recent acquisitions such as Agrible and Waypoint. So just recently, we released our 2020 ESG report, which is now available on our website, if you are interested in more details. So in Page 4 (sic) [ Page 10 ], just to talk a bit about a few outlook factors for this year. Number one, the U.S. spring season, as we kind of expected, we are seeing a stronger demand. It's like a bounce here from last year's bad record, bad weather, and we are seeing the 15 million acre materialized and expected increased seeded area and $8 million of that being corn and soybeans. And that's kind of fueling some of the stronger demand we have already seen in Q1, and there is a -- it's carrying over to Q2. In contrast to last year as well, we had significant issues with the trade disputes. So this year, the trade deal so far is holding despite some kind of [ loud words ] recently. But we anticipate that this will continue to bode well for grain and oilseed exports and for the crop input sector in general. International growers are continuing to see good demand. Specifically, Brazil is growing 40%. And Australia, that had suffered quite a bit last year with droughts and fires [indiscernible]. So this is a good improvement as we had expected. And then finally, potash markets. Additional clarity has been provided. I think we didn't like the price as much that have been set. I think more than one competitor kind of mentioned that. But it does set a kind of a floor to the market, and we have seen some appreciations and some volume move already since the signage of that contract. So to bring it together, I think we are -- we have a world-class portfolio of assets with a very broad exposure to agriculture value chain, leading and scalable -- industry-leading in scale in the fertilizer space, a retail platform that provides cash flows for the ag cycle and provides good support to our dividends and a strong balance sheet and commitment to our best-in-class dividend and a very disciplined capital allocation. So with that, I conclude, and I'm open for questions, Adam.

All right. Thank you, Pedro. It's a very nice run-through of the business. Maybe if we could start. Just given the commodity price environment that we're in and some of the concerns that exist around low corn prices, can you help just frame kind of the risks or opportunities that present for Nutrien as you think about the next 12 to 18 months, I think most notably on the retail side, but the impacts on potash nitrogen as well?

Yes. So we -- as I mentioned before, for Q1 and Q2, there is a lot more visibility in the commodity prices in general. I mean, good or bad, it's a lot more visible. I think from a potash standpoint, we are probably very close to the bottom of the market if we're not at the bottom of the market. And I think the fact that we signed the agreement is really indicating that we are kind of at the bottom of it as we start seeing volumes and price increases, specifically in Brazil, which is a spot market. So that kind of bodes well. We don't know about the rate of recovery through the year, but we expect volumes to actually increase over last year by about 1 million tonnes. So that's potash. In terms of nitrogen, we are seeing kind of a strong demand on the additional acreage for this period, for the first half of the year. However, we think that with COVID-19, oil being depressed and its prices is going to compete with biofuels, biofuels, such as palm oil or ethanol, which are being hit more specifically in both indirectly or directly consuming potash, so there's some difference there. So that was a potash comment, not a nitrogen comment. But it would also impact, of course, in the long term, if oil continues to be low, it may impact some of the nitrogen as well. But we think volumes are going to be there. We think industrial nitrogen may be a bit softer in the future there. And then finally, in terms of agriculture, we're seeing a strong momentum right now. So I think this bodes well both weather and the bounce back in terms of acreage for the beginning of this year. We -- as you know, we have a very big Q2. So that's going to be important. And I think we're entering that with good momentum, good set of inventories and well positioned. The second half of the year, we'll have to see what happens to corn and what happens to energy and ethanol and biofuel, specifically, to see if there is going to be as much incentive to plant corn as we go to the fall season. But if it doesn't get planted in corn, we'll probably see a rotation of crops because people will still plant the entire available space, just maybe with different crops. Of course, the shift in crops may have an impact in terms of fertilizer consumption, as corn is more intense in fertilizer than other crops. But I think we'll still be there. But it's still a bit early to call the impact in 2021. I think there are too many variables to kind of think about 2021 as we sit right here.

Okay. That's helpful. And so maybe continuing just on retail and trying to think about some of the changes in the market as -- I mean, as digital and precision ag become more important kind of competitive forces, just how does Nutrien compete in that world? And what opportunities does that present? What are some of the challenges that can present on cost or competition? And just how do you think about that evolving landscape on the retail side?

Yes. So I think let me talk about digital. We are, we believe, leading in digital. Our digital platform has started very well. We kind of started this whole thing about Q1 last year. And at that point in time, our penetration in digital and the products that are available in the digital platform were only 1%. So today, just a few quarters later, so a year later, we are seeing a 40% penetration of everything we offer in the platform. So our intent is that we will continue to offer the entire suite of products and services in the platform, and I think we'll have that completed by the end of next year. So if you are a farmer, you have full access and full visibility of everything, which is -- we offer. And of course, you have your price discounts, which will be related to your relationship with Nutrien or the size, but there will be full transparency of everything and availability to order through the platform. So a lot of that sale is still being ordered through agronomists, but we actually do not discourage that because we think that the relationship with the agronomist is very important, and it's a way to kind of deepen our relationship to -- with our customers. So we -- there's not a lot of people who will be able to invest as much as Nutrien. We have approximately 21%, 22% of the market, which has increased over time. Our next biggest competitor is about 1/3 our size. So it becomes a lot more difficult to support the platform and the growth of it. And we have been approached in the past to potentially licensing the platform. We think that there are some advantages of doing so but there is also some other strategic considerations. So we are looking at the pros and cons. So we're likely going to take a position on that at some point in time soon. So I think the platform other than just e-commerce also provides a lot of functionality to the farmer in terms of preplanning and the ability to basically plot the entire farm, do some soil sampling, have specific advice. We are brand agnostic, so therefore, we sell whatever we feel that's best to the farmer. So there is a much greater opportunity to deepen the relationship with our existing customers and [ continue with ] customers, especially now that everybody is getting by force a lot more used to technology because that's the way they can transact today with a lot of people. So I think the digital platform is a great opportunity to reduce costs, to deepen relationships, to get more stickiness. So all in all, we are very bullish about it. In terms of precision ag, we've been dealing with that for years. And we are a promoter, we are big customers in terms of Echelon. So we are promoters of that. And given the fact that we sell 50% -- we basically deliver 50% or apply 50% of what we sell, it is in our best interest to develop that service opportunity as well. So I don't think it's going to be anything new. We are a proponent of it. I think we'll benefit from it. But it's probably going to be a technology that will gradually be adopted because it's too expensive. And the ROI on some of those are still difficult to determine.

Okay. That's helpful. And then just maybe touching on kind of the point on scale that you mentioned and the challenges for some smaller competitors to adopt some of these technologies. I mean, have you seen any change in that tuck-in pipeline in North America, whether it's because of precision ag, whether it's because of COVID? Just help us think about the opportunity set over this year as we build in some growth into next.

Yes. So our tuck-in strategy is -- has been very constant. But actually, last year, I thought that we were going to have a kind of acceleration of that strategy given the fact that we have a very unfavorable environment. But in essence, I think it was a bit of a deceleration because EBITDAs were depressed and a lot of people who are trying to catch out of their businesses are waiting for a more favorable time to do so. So I'm not quite sure this year how that's going to evolve. It may be that they will continue to do -- those that can afford, will continue to wait for a more opportune time to cash out. But our strategy has been very good. We're kind of buying in multiples of 6 and 7; and after synergies, of 4 and 5. So we are we're fairly happy with the accretion that those opportunities will create. Adam?

Sorry. I hit mute on mine. Maybe I will use this as an opportunity to bring in a question from the webcast that's about capital allocation in the current environment and just trying to think about the balance of COVID and the commodity prices and, more broadly, how Nutrien is thinking about balancing shareholder returns against M&A, against liquidity and leverage and what your -- how you're prioritizing kind of use and deployment of cash right now.

Yes, certainly. So maybe I should start by mentioning that we are producing a lot of cash. It seems like an obvious statement, but at this time in COVID, not all the companies are fully operating, and we are -- we have never stopped. And this is the part of being essential critical. So our cash flow generation has been good. So our framework for capital obligation starts with sustaining capital, which is to keep our existing assets in good upkeep for reliability and efficiency and safety. And we are investing typically about a $1 billion to $1.2 billion there. We have lowered some of that a bit to about $900 million to $1 billion in the last guidance, and that is more related to COVID-19 restrictions on delivery of equipment, mechanical, electrical and some need for social distancing as some of the projects we have would require us to put a large amount of contracts [ in a smaller village ], and that becomes very difficult to do. So I think that's just that slide into next year from this year. And so we'll eventually get that back, but it may not be all next year, but I think it's our intent to keep that going. Then after sustaining capital, we try to keep a very good balance sheet. So our BBB flat rating is important to us. It provides funds for -- seasonal funds for our retail, which has large seasonality swing. And therefore, we're trying to do our best to keep the balance sheet as strong as possible. So you saw us kind of announce that we have some bilaterals. Those were replaced by an issue earlier this week of about $1.5 million. So we think we are fairly secure from a balance sheet and liquidity standpoint. The third one is just maintaining in terms of our dividend stable and growing dividend. And I -- we had our payment in Q1. We announced our payment in Q2 and some intent to continue to maintain our dividend policy intact of growing and stable dividends. That is basically paying about 40% to 60% of our cash flow. It's now at about 56%. And we believe the dividend is fairly attractive to investors right now as our yield is 5.7%. So very committed to do it, and we think we can do it on the strength of cash flow from retail as well, which is a much more linear business than the other 2. And then finally, all the cash that is left, it's on a compete-for-capital basis. We would assess organic investment opportunities -- inorganic investment opportunities and return to shareholder. At this point in time, we are pruning some of our investment in the future. There was a number of projects we were going to do. They were related to capacity with efficiency. We didn't think that they will pay back at this point in time. I think they're still good projects, but they will be put in a pause to be done a little bit later. That will free some capital for us as well. But then we'll be looking at what to do with that capital in terms of inorganic and return to shareholders as soon as we get a bit better visibility of the future. So COVID really created a lot of unknowns and knowns. There are a lot of things that we don't have a typical model. So we are waiting a bit so that the environment becomes a little bit more transparent in the future in terms of returning to work or the economy, so that we can make a better judgment about where to allocate that capital.

Okay. That's very helpful. Maybe switching gears to the potash business a little bit. And obviously, you had a recent settlement with China. I think there was some public comments on the earnings call, and some of your competitors as well were less than pleased with it. Maybe just help us think about market structure and just China actually being a contract market and what value that actually serves at this point today.

Yes. I think -- well, the China dynamic has been played out for a number of years. I think we are -- as you mentioned, we are not entirely pleased with the prices there. But I think -- hence, that's the reason why we kept our contract a bit shorter. I think we have another opportunity for a discussion in October when our contract will expire with China. That was our way to find a way to get a logical business likely to get into that contract. And then we'll see kind of how the world shapes up. I think we'll have a lot better visibility of the future in Q3 versus now. So we'll be in a better position to negotiate. We think that there is going to be still need for more potash. We continue to see the trend for the longer term to be about a 2.5% growth in the market, of course, with the web -- ebbs and flows that we have seen. So I think when we go back, that will be a different contract. In other parts of the world, of course, there has been good demand for potash. We also signed with India at $230, and Brazil continues to show very strong demand. So I don't know what the rate of improvement throughout the year. But I think it's probably going to be more upside than downside from now on, now that we have the contracts signed.

Okay. And maybe -- and this isn't obviously just a Nutrien question as it applies to all of Canpotex. But the strategy for a number of years has been to be that swing producer and to take volumes off in periods of weaker demand to balance the market. Just how do you think about market share in that context and the significant unutilized capacity that Nutrien has today? And just the role that the -- does that -- is that actually good for the market long term or you've kind of conditioned the market to think that Canpotex or Canadian producers are going to be the ones who absorb market demand loss?

Well, I think the market will continue to tighten a little bit. There is some new capacity being put in there, but there's also a 2.5% demand growth that we are foreseeing in the future. So we think there will be a little tightening. I think our intent is not to relinquish our existing market share but to grow with the market, and we think the market will grow.

Okay, okay. And then just as we think about the cost position today, is there anything else you can do in the portfolio to further improve the cost position or as we think longer-term in some of that 6 million tonnes coming into your sales that actually comes in at higher unit costs because those are the highest -- the higher-cost mines in your portfolio?

Yes. No, actually, I think will be the opposite. The more we grow, the cheaper it gets because all that capacity is paid for. And so this is -- this comes at a very little capital. It's capacity that came with the formation of the company. So the next -- the 12 million to 18 million tonnes, it's all paid-for capacity, and it will come at a very advantageous price. So we think as the market grows, we get more advantage with the scale and the capacity utilization being like higher capacity utilized. And then even after that, we have further opportunities at brownfield cost levels. So we have plenty of capacity to grow. And the more it grows, the more advantaged our cost will be.

Okay. And then I guess we're getting close to the end. I'd be remiss if I didn't sneak in one on the nitrogen side. And maybe just frame kind of the risks and opportunities in the nitrogen market over the next 6 to 12 months. And you highlighted the industrial markets earlier in the presentation. Any color just around kind of where you see the kind of potential pluses and minuses and thinking about the Trinidad capacity and the decision to idle some of that in that context?

Yes. So in terms of the opportunity, the opportunity is, of course, the market, we view, it continues to grow, and there's not a lot of investments being foreseen to attend to the demand. So there was slight tightening. It's a much bigger market with a slower growth than potash, we think. But it's still -- on the basis of the bigger market, there's still going to be good opportunity there. In terms of the shorter term and some of that caused by COVID-19, we think there's some pressure on prices. And the pressure on prices is both because of oil and gas and the industrial demand, which is more correlated to GDP. So as the world reduces the demand for that industrial ammonia, then there would be more pressure on that piece. So our production is about 50% industrial, 50% ag. But the 50% that's in industrial is not all GDP correlated. It's only a part of that. And a lot of our Trinidad production is more industrial. So Trinidad is about 1/3 of our nitrogen production. The other 2/3 are in the U.S. and Canada. And the third in Trinidad, which is the industrial, is also at a higher cost because, yes, there will be -- the feedstock is at a higher cost. So there, we have 4 plants, and the most inefficient of those plants is the second plant that we have and the smallest. And so the decision there is to put in care and maintenance and flow some of that volume to other more efficient plants and curtail some of the volume on that. So it's -- to put it into perspective, it's like 1/4 -- or less than 1/4 of 1/3 of our production in terms of the impact. And some of that is offset by the rest of the network. However, yes, we'll continue to monitor the market and see what's logical to do like we did before and like other produces will likely do, too.

Okay. Great. Well, we're just about out of time, so maybe we're going to stop it there. I want to -- Pedro, Richard, Tim, I want to thank you and Nutrien for participating today and thank the audience for joining us for today and hope you join us again tomorrow for the last day of our Industrials and Materials Conference. Thank you, and good afternoon, everyone.

Thank you.